The worst market crisis in 60 years

Courtesy of the Economic Reform Australia Information Network:

by George Soros
Published: January 23 2008

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

The writer is chairman of Soros Fund Management
Copyright The Financial Times Limited 2008

Northern Rock’s missing Granite

Courtesy of David Weston, here’s an important statement from John McDonnell MP.

The most important point is that a dogmatic belief in markets has become government policy.

northern-rocks-missing-granite.pdf

 

Campaign for Honest Money

Campaign for Honest Money

Here is a simple statement and form from Anne Belsey, the remarkable founder of the Money Reform Party, with which to collect signatures.

It asks you and me to sign what Austin Mitchell MP asks his fellow Parliamentarians to sign with our latest Early Day Motion.

Monetary Reform Party Newsletter

MRP Newsletter – February 2008

The coming year

With the days lengthening, I have been thinking about the forthcoming year and how best we might campaign to promote money reform. Last year’s efforts were devoted largely to Operation Money As Debt, which was getting as many copies as possible of the DVD ‘Money As Debt’ into the awareness of individuals and groups concerned about matters of public policy.

It scarcely set the world alight, but this is not due to any fault of the DVD, but rather due to my expectations that it would be sufficient. Clearly it is not. I think that besides anonymous DVDs, we need money reform to be identified with real people – us.

I think that more of us have to think about getting ourselves known locally as ‘that money reform person’, giving our neighbours a name and a face to whom they can refer when they are wondering about the money-related issues currently in the news. Fortunately, in the last twelve months our numbers have steadily increased, and although we are still a very small party, I am confident that local campaigning could start to be effective. This is particularly the case now that the ‘credit crunch’ is very much in the news.

Electioneering

After my dismal performance at Bromley in 2006, I thought that maybe election campaigning would be a waste of time and money for a good number of years, and that we should concentrate on educational projects, hence my push of the ‘Money As Debt’ DVD. However, with the Northern Rock and the ‘credit crunch’ still very much in the news, I think that a bit of old-style election campaigning would not go amiss. We have a long way to go, so for myself, the next election campaign will be starting now.

My proposal is that members (who wish to do so) each adopt a Parliamentary constituency and then promote money reform within that constituency as if they were seriously going to stand for election. I say ‘as if’ because it does not require any commitment to stand.

If the level of interest is insufficient to justify the expense of standing, or if you simply do not wish to stand, or if you are lucky enough to recruit a thrusting young would-be MP who is keen to stand, then you do not have to stand. Ultimately, there is no need to decide until the election is called, but I think it would be a useful exercise to campaign with the possibility of standing in mind, as a way of focussing the mind. (There are plenty of constituencies to go around, should there be a clash, the first member who selects a given constituency will run the campaign.)

The earliest that a general election is likely is May 2009, and it might not be until May 2010. So I am calling this project Campaign 2009.

My own plan is to campaign within the Canterbury constituency. This is not actually where I live, the boundary is about two miles away, but it is where I am active in the local credit union, so have more involvement here than in my own constituency which is geographically too extensive for easy campaigning.

I have a number of ideas for raising the profile of the Money Reform Party, which collectively I plan to use in my locality. My aim is that come the next general election, no one in the Canterbury constituency, who is even remotely considering voting, will say

‘I have never heard of the Money Reform Party.’

Campaign 2009

1. Guide to Household Budgeting

This was something that I wrote for my credit union, and we have agreed to do two versions, one published by the Canterbury Credit Union and one by the Money Reform Party, with myself listed as author and copyright holder in both cases.

This is a 16 page booklet which (as it says on the cover) is a simple guide to household budgeting. It is aimed at people who have trouble with their household finances, based on my experiences with my credit union. Some people have difficulties with the most elementary aspects of money matters (and they are not all on benefits or minimum wages). They will never understand the issues around money reform, but we can instil in them the idea that the Money Reform Party is worth supporting.

I have had 1000 copes printed (for £300) for distribution free to libraries, community centres, doctor’s surgeries, charities, day centres, housing associations, mums’ and toddlers’ groups, shops and any other groups that I can think of.

The idea of this is to get the Money Reform Party ‘brand’ known (and trusted) into as many households as possible. The guide contains useful addresses, credit union details, local Citizen’s Advice Bureaux, national free debt help organisations, credit rating agencies, and other useful contacts. The idea is that it is something people will keep, refer to and come to trust for advice and information.

I have great hopes for this little booklet. It is short enough to be read, useful enough to be kept,. If people keep it and refer to it, it will plant awareness of the ‘The Money Reform Party’ brand in their mind as sensible, practical, reliable and very much in the mainstream of popular thinking. Just the qualities with which we want to be associated, and of course, we will simply become better known.

I can forward email copies to anyone who wants to print their own local versions.

2. Leaflet drops

I have written a leaflet (see attached) explaining the credit crunch in simple terms, which I shall deliver as an experiment in certain selected areas.

I might write, print and distribute other leaflets in due course if they seem to be appropriate and effective.

3. Petition

With the warmer weather, it will soon become a good time for getting out onto to streets with the petition (see attached). I have tweaked it slightly to bring in the issue of boom and busts in the economy. The idea of this is not to get numbers of signatures (although if we collect a million, I won’t complain).

It is intended as an ice-breaker. If people are curious about the issue of honest money, it is a chance to briefly talk about to them about it, leaving the enquirer with a leaflet or even a copy of the DVD.

4.Talks to groups

I plan to offer myself to local groups to give a talk about the credit crunch. I could probably do this off the cuff myself, but if anyone else is interested in doing the same (and wants some help), I shall draw up a ‘script’ to act as the basis for their own talks.

5. City centre talks

I also plan to perform my talk in Canterbury city centre. This is not uncommon. On warm summer days, there often to be found one or two individuals doing this, usually on a religious theme. Canterbury is something of a tourist trap, so there are usually plenty of people milling around with nothing much to do.

6. Mail-outs to groups

To advertise my talks, I shall mail local groups. I shall include copies of the Budgeting Guide and/or DVD, depending on the nature of the group. Even if this does not result in a booking at least someone in the group will hear about the MRP.

7. Letters to local press

These are something that I shall write when the opportunity arises. I think that such letters need to be short, pithy and pertinent. The important thing is less what is said, but the fact that they are signed by a member of the Money Reform Party.

8. DVDs

The Money As Debt DVD remains a useful tool in our tool-box, but it needs to be used judiciously. To this end, I shall be making copies available to members of the Party for £1 each when they are ordered in batches of 10 or more. This is effectively cost price. I shall not be sending out any more free ones ‘on spec’ as I have done, so do not need the funding arrangements for Operation Money As Debt, which is effectively ended, although copies will still be available to non-members at £5 each.

The Aim of Campaign 2009

My aim for Campaign 2009 (Canterbury) is that, by the next general election, everyone who lives in the Canterbury constituency will have heard of the Money Reform Party and will have an idea of our policy, or at least regard us (that is me) as sound individuals who they might like to support (in the absence of clear policies promoted by the main parties). I hope also to have some idea of the level of support and whether or not it is worthwhile standing at the next general election.

My hope is that my lead will be followed by sufficient other Party members that Campaign 2009 will truly be a national campaign and not merely confined to this one corner of Kent.

Cost

With the cost of printing the Guide, the leaflets, postage and travelling about, I expect to spend about £500 on this campaign. If I decide to stand for election, I shall expect to spend another £1,500 (£500 for the deposit, £1000 for enough leaflets for the Royal Mail free delivery).

I think that a worthwhile campaign could be conducted for as little as £100 (a few dozen copies of the Guide judiciously distributed), and remember that the more you put into a campaign the more likely you are to attract new members and/or supporters in your area to assist you. Your local credit union or CAB might even be willing to buy some copies of the Guide for their own purposes.

Fund for Campaign 2009

I shall be funding my own campaigning out of my own pocket. The money that I receive for future DVD sales will simply go towards buying the next batch. Thereafter, at cost price (to party members), selling DVDs will not bring any income to the Party.

Those who want to contribute financially to the Campaign can contribute to a Fund, which will be available to those members who want to help Campaign 2009 in their locality, but are a bit short of funds. I shall administer this fund and try and distribute it fairly (I shall work how when I need to.) Naturally, any informal arrangements between members and/or supporters are entirely acceptable.

Life membership of the Party is just £1. The idea is that members spend their own money campaigning in their own way. I do not know how much membership of other parties costs, but I think that an annual expenditure by Party members on their own efforts of at least £50 is reasonable (that’s less than £1 per week).

Reporting costs

If, as I hope, this Campaign raises the profile of the Party, we shall have to be scrupulous in reporting our income and costs to the Electoral Commission. If you spend about £50 or more, say on a batch of leaflets or Guides, let me know, then I can put it through the books as both an Income (donation) and Expenditure (printing). This applies whether it is your own money or a donation from someone else.

Locating your chosen constituency

To find out the extent of your chosen constituency, there is a useful website called www.election-maps.co.uk, run by the Ordnance Survey which shows the geographical boundaries of Parliamentary constituencies (and other election areas).

Unlimited activity

The ideas listed above are just my ideas for promoting money reform. Other members might have other ideas, and I would be glad to hear them and share them. Just remember that they have to be cost-effective and they need to be legal, moral and factual.

We are a very small Party, but that does not mean that we are a fringe element within society. We need to show that our ideas are right in centre of popular views on the need for fairness and stability within the economy.

I remind members that any association with extreme and unpalatable political ideas of either the left or right automatically disbars an individual from membership of the Party.

Concerning CAMPAIGN 2009, commence with the ‘credit crunch’, connect it with common community concerns, and continue with concise, conservative communications.

The next couple of years could prove to be very historic ones with regard to the British economy, we need to get ourselves into the forefront of public awareness.

Best wishes

Anne Belsey

Our Current Early Day Motion

Early Day Motions (EDMs) are a way of attracting attention to events or campaigns and seek parliamentary support for a cause.

Since 2002, the Forum has initiated the tabling of eight EDMs.

Our current one is entitled Green Credit for Green Growth.

In the spirit of ‘Climate Capitalism‘ MPs can be invited to sign via WriteToThem.

Inquiry into the Economics of Climate Change

We have been waiting for nearly a year to see our submission to the Treasury Select Committee published. It was entitled “Green Credit for Green Purposes” and was in response to the Stern review that investigated the economics of climate change.

As a pdf file, this Stern review report is a shortened version of the printed book, where, on page 62, the Forum is mentioned as a one-line submitter in position 5.

The printed document, however, contains all our 63 paragraphs that include 3 graphs from Aubrey Meyer’s work on Contraction & Convergence.

It is available for £24 from the Parliamentary Bookshop in Westminster.

On-line it can be ordered here.

Please note that FEASTA‘s submission is reproduced as evidence no. 18 from page Ev 125 and one paragraph on Ev 126.

All other submissions come from companies whose approach would be ‘business as usual’ or shall we say ‘capital as usual’?